September 2018 ISM and Markit Services Indices Again Mixed

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle and improved. Markit PMI Services Index again declined but remains in growth territory.

Analyst Opinion of the ISM and Markit Services Survey

Both services surveys are in expansion - and their intensity of growth and general trends are different again this month. Markit shows this sector's growth rate is slowing whilst the ISM Services growth rate is improving. Pretty hard to draw conclusions when one survey is improving and the other slowing.

From Econoday:

From Markit:

Service sector activity growth dips to eight-month low

• Business activity expands at weaker pace
• ▪ Prices charged inflation at record high
• The pace of job creation at joint-fastest since June 2014
• September data signalled a solid expansion of business activity across the U.S. service sector, albeit with the rate of growth easing to an eightmonth low. A downturn in business optimism about the year ahead to the weakest since December 2017 was also recorded.
• Encouragingly, new orders growth regained momentum, adding to existing pressure on operating capacity. Backlogs rose for the first time since June, and job creation was the joint-fastest for over four years as firms took on more staff to meet demand. Meanwhile, output price inflation accelerated to the quickest in the series history amid a faster rise in cost burdens. The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 53.5 in September, down from 54.8 in August. The latest figure indicated the weakest growth since January, with the rate of expansion softening for the fourth month running. Nonetheless, the average for the third quarter of 2018 was strong overall. Anecdotal evidence cited greater demand, however, some clients were apprehensive due to reports of a sluggish housing market.

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From the ISM Services report:

Economic activity in the non-manufacturing sector grew in September for the 104th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee: "The NMI® registered 61.6 percent, which is 3.1 percentage points higher than the August reading of 58.5 percent. This represents continued growth in the non-manufacturing sector at a faster rate and is an all-time high for the NMI® since the inception of the composite index in 2008. The Non-Manufacturing Business Activity Index increased to 65.2 percent, 4.5 percentage points higher than the August reading of 60.7 percent, reflecting growth for the 110th consecutive month, at a faster rate in September. The New Orders Index registered 61.6 percent, 1.2 percentage points higher than the reading of 60.4 percent in August. The Employment Index increased 5.7 percentage points in September to 62.4 percent from the August reading of 56.7 percent. The Prices Index increased by 1.4 percentage points from the August reading of 62.8 percent to 64.2 percent, indicating that prices increased in September for the 31st consecutive month. According to the NMI®, 17 non-manufacturing industries reported growth. The non-manufacturing sector has had two consecutive months of strong growth since the 'cooling off' in July. Overall, respondents remain positive about business conditions and the current and future economy. Concerns remain about capacity, logistics and the uncertainty with global trade."

INDUSTRY PERFORMANCE The 17 non-manufacturing industries reporting growth in September — listed in order — are: Mining; Real Estate, Rental & Leasing; Wholesale Trade; Management of Companies & Support Services; Construction; Retail Trade; Arts, Entertainment & Recreation; Professional, Scientific & Technical Services; Transportation & Warehousing; Information; Accommodation & Food Services; Health Care & Social Assistance; Public Administration; Other Services; Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; and Utilities. No industry reported a decrease in September.

ISM Services Index

There are two sub-indexes in the ISM Services which have good correlations to the economy - the Business Activity Index and the New Orders Index - both have good track records in spotting an incipient recession - both remaining in territories associated with expansion.

This index and its associated sub-indices are fairly volatile.

• The Business Activity sub-index improved 4.5 points and now is at 65.2
• The New Orders Index improved 1.2 and is currently at 61.6

The complete ISM manufacturing and non-manufacturing survey table is below.

 

Econintersect does give serious consideration to this survey as the service sector accounts for 80% of the economy and 90% of employment. However, this an opinion survey and is not hard data.

Caveats on the use of ISM Non-Manufacturing Index:

This is a survey, a quantification of opinion. However, as pointed out above, certain elements of this survey have good to excellent correlation to the economy for as long as it has been in existence. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions.

The main ISM non-manufacturing index (NMI) is so new that it does not have enough data history to have reliable certainty about how it correlates to the economy. Again, two sub-indices (business activity and new orders) do have good correlation for the limited history available.

No survey is accurate in projecting employment - and the ISM Non-Manufacturing Employment Index is no exception. Although there are some general correlation in trends if you stand far enough back from this graph, month-to-month movements have not correlated well with the BLS Service Sector Employment data.

From Econoday:

The ISM non-manufacturing survey does not compile a composite index like its manufacturing cousin. The business activity index, which is actually akin to the production index in the manufacturing survey, is widely followed as the key figure from this survey.